3 Investment Rules to Live By

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Successful investors know that due diligence and strategic planning are necessary to stay ahead of the curve. Over time, you may find that you’ve developed certain rules that help you invest better and make smarter decisions. If so, you might already know some or all of these three essential rules. If you don’t, you should consider adding them to your list.

Here are 3 simple rules that every successful investor swears by.

Brand Name Matters

The first rule is simple – brand name matters. The best-in-breed companies are best for a reason. There’s a similar saying in real estate, as well – don’t buy the best house if it’s in a bad neighborhood. Value investors are often guilty of ignoring this rule because they confuse undervalued companies with second-rate companies.

A strong brand name company or stock is a top pick for a number of reasons. They generally have a large market share, sell a product or service that is in demand and are owned by institutional investors. This makes them very competitive relative to their peers and will generally outperform them over time.

Don’t Be Afraid to Hold Cash

It’s a common misconception that holding a large amount of cash means you’re making a mistake and missing out on potential gains. While there might be a case to be made about opportunity cost, there’s also a case to be made for patience.

Consider a scenario in which an investor is 100 percent committed in the market with a portfolio of stocks and nothing in cash holdings. But then an opportunity arises in a stock that could result in big gains. The investor who has cash on stand-by can immediately jump in and purchase the stock, while the one who doesn’t have cash on hand will have to make a choice about what stock to sell, if any, and wait for the sale to go through before making a purchase.

Invest Like It’s For Someone Else

Investing is often a solitary activity. While that’s not a bad thing, it can lead to a certain kind of laziness that could spell big trouble for the undisciplined investor. That brings us to rule number three – invest like it’s for someone else.

You might buy a stock simply because it looks cheap and you like the company, but if you tried explaining to someone else that you bought a stock for them with that explanation, you’d be fired pretty quickly. If you can’t explain your reasoning for holding a stock and why it will go higher, then you shouldn’t own it.

Obeying the above three rules will almost certainly improve your investment performance, but it doesn’t stop there. Incorporating these into other lessons you’ve learned will help you make smarter investment decisions and increase your returns.